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FINANCE LEASE

In the letter of the law a Finance Lease is effectively an Equipment Hire Agreement for a fixed term and at a fixed rate. The Customer chooses the equipment supplier, specification & price, then the Lender purchases the equipment on your behalf and subsequently hires the equipment to you on a fixed term/rate agreement. The Customer does not own the equipment so therefore it qualifies as an operating expense and these can be deducted from your taxable profits as a trading expense. The VAT is paid along with the monthly rentals for better cashflow.

At the end of the Primary Rental, for example 36 months (3 years) period the agreement automatically goes into a Secondary Rental period which means that you pay the equivalent of one month’s rental once a year for a period typically a further two years.

In the past most Lenders used to sell the equipment after the final Primary period rental had been paid by the Customer. The Lender would then invoice a nominated third party for one month’s additional rental payment for transfer of title. The third party would then duly invoice the Customer one month’s fee for full ownership.

If you wish to settle your Finance Lease early i.e. end of month 22 on a 36 month agreement then the settlement figure would be the 14 monthly remaining payments + an early settlement fee. As a point of interest the industry has a very low early redemption rate. In our experience most customers allow their finance agreements to run the full term. In our experience it pays to discuss what equipment your buying, please call us on 01604 696322 to answer any further questions.

HIRE PURCHASE

Hire Purchase is effectively a Hire Agreement for a fixed term, but you have also agreed to purchase the equipment from the outset. From the start of the agreement your business is treated as the owner of the equipment, which means you can claim the capital allowances. The interest you pay can also be deducted from your taxable profits as a trading expense.

You will make regular monthly payments over a fixed term and eventually secure ownership of the asset in full once the final payment has been made by you the Customer. At the term end there is usually a Document Fee £100.00 to £175.00 + VAT, depending on the Lender.

Hire Purchase Agreements are normally used for Plant, Machinery & Vehicles the Customer pays all the VAT and a number of rentals in advance (typically 3) on signing, followed by how ever many monthly rentals have been agreed.

If you settle an HP agreement early, then the Lender calculates the outstanding interest, fees etc and will duly advise a final settlement figure. In our experience it pays to discuss what equipment your buying, please call us on 01604 696322 to answer any further questions.